Wilbur Ross: US and China’s ZTE have reached a deal

Chinese smartphone maker ZTE will pay a fine of $ 1 billion and bring an American monitoring team on board to resolve a high-profile dispute with the United States.

The full terms of the deal — announced by US Commerce Secretary Wilbur Ross — were not clear. The deal could mean the end of a ban on ZTE buying American parts.

Ross said the deal was struck at around 6 a.m. ET on Thursday, and it will impose “the most strict compliance that we’ve ever had on any company, American or foreign.” ZTE will also put $ 400 million in an escrow account.

“We are literally embedding a compliance department of our choosing into the company,” Ross said on CNBC.

The fate of the company has become a major flashpoint in trade tensions between the United States and China.

In April, the US Commerce Department blocked American firms from selling parts or providing services to ZTE, which also makes telecommunications equipment.

The crippling ban was put in place after Washington said ZTE violated a 2017 deal in which the Chinese company admitted to evading sanctions on Iran and North Korea.

The new agreement will force ZTE (ZTCOF) to replace its top management and board, Ross said. The compliance team will report to the company’s new chairman, he added.

Related: ZTE will suffer lasting damage from ban

The $ 400 million will be forfeited if ZTE violates the terms.

“I’m very, very happy with this arrangement,” Ross said. “It is the strictest and largest fine that has ever been brought by the Commerce Department.”

ZTE, which employs around 75,000 people worldwide, buys key components from a range of US companies, including chips from Qualcomm (QCOM) and Intel (INTC). It said on May 9 that it had halted most of its operations because of the ban.

President Donald Trump announced in mid-May that he was working with Chinese President Xi Jinping to give ZTE “a way to get back into business, fast.” But his remarks unleashed a backlash in Washington that fueled uncertainty over whether the company would ever get a reprieve.

Analysts say the ban is likely to have cost ZTE billions of dollars in lost revenue, tarnished its brand and strained its relationships with customers around the world.

Related: Facebook says it gave Huawei access to user data

ZTE has repeatedly come under the scrutiny of regulators and officials in the United States, which is wary of its ties to the Chinese government. The company’s controlling shareholder is Shenzhen Zhongxingxin Telecommunications Equipment, a Chinese state-owned corporation.

In 2012, ZTE and Huawei, another huge Chinese tech company, were the subject of a US congressional report that focused on the equipment they make for telecommunications networks.

The report said the companies “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.” Both companies strongly disputed the report’s findings.

China’s efforts to boost its high-tech industries are a key source of tension between the two countries. And ZTE plays a role in Beijing’s tech ambitions.

It is one of several Chinese tech firms aggressively pursuing the development of 5G, the next generation in wireless network technology. The company boasts government and corporate clients in more than 160 countries and regions.in.
countrywide stock chart

Related: 10 years after the crisis, have we learned anything?

Did Mozilo get off easy?

For his twin roles at Countrywide and IndyMac, two of the most notorious names of the crisis, Mozilo is remembered as one of the villains of 2008. Time magazine named him one of the 25 people to blame for the financial meltdown.

Yet, like other major figures in the crisis, Mozilo largely evaded tough penalties from the government.

For years, the Justice Department considered bringing criminal and civil charges against Mozilo. Neither brought a case.

“I look at Angelo as one who got off about as easy as anybody,” said Nathan Stovall, senior research analyst at S&P Global Market Intelligence.

In 2009, the SEC accused Mozilo of duping investors about how vulnerable Countrywide was to subprime mortgages — and then using inside information to dump $ 139 million of his own shares in 2006 and 2007 before they tanked.

While Mozilo was telling shareholders that Countrywide mostly lent to healthy borrowers, the SEC said, he was sounding the alarm inside the company with a “series of increasingly dire assessments” about the dangers ahead.

Specifically, Mozilo warned about the risks of 80/20 subprime loans, which allow borrowers with weak credit scores to buy a home without a down payment by taking out two loans, one for 80% of the value and a second for the remaining 20%.

“In all my years in the business,” Mozilo told top lieutenants in an April 2006 email that was later published by the Financial Crisis Inquiry Commission, “I have never seen a more toxic” product.

In a separate email that month, Mozilo said that he had “personally observed a serious lack of compliance” within Countrywide’s process of documenting mortgages and a “deterioration in the quality of loans.”

Mozilo also said that Countrywide was “flying blind” because it had “no way” to predict the performance of pay-option ARMs.

Related: My road back from the Great Recession

Shareholders ‘run over’

To shareholders, Mozilo was hardly sounding the alarm.

At an industry conference just weeks later, in May 2006, Mozilo said Countrywide viewed the pay-option mortgages as a “sound investment.” He repeatedly held up Countrywide as a safe lender that avoided the risky excesses of its peers.

Mozilo denied the SEC charges and agreed in October 2010 to pay $ 67.5 million to settle them. The SEC hailed it at the time as the largest penalty ever against a senior executive of a public company, but Bank of America paid two-thirds of the fine.

Mozilo wasn’t targeted by Bank of America, despite the mountain of legal problems the bank inherited from Countrywide. Stovall estimates that Countrywide cost Bank of America and its shareholders at least $ 50 billion in legal bills, repurchases of faulty mortgages and other expenses.

“Bank of America shareholders got run over, not by a steamroller, but by another planet,” Bove said. “Mozilo wasn’t harmed at all.”

Reached by phone in California, the 79-year-old Mozilo declined to speak. His lawyer did not respond to a request for comment. Bank of America declined to comment.
Angelo Mozilo Countrywide 2008

‘A level of denial’

Even two years after Countrywide’s collapse, Mozilo maintained that his company was an enormous force for good.

“Countrywide was one of the greatest companies in the history of this country and probably made more difference to society, to the integrity of our society, than any company in America in the history of America,” he told federal investigators in 2010.

One former senior executive at Countrywide told CNNMoney that “Angelo really believed he was doing wonderful things for American housing.”

But at least some Countrywide employees were more skeptical.

“I did not trust what was being told to me by my senior executives,” the executive said. “There was a level of denial,” the exec said.

Of course, Mozilo is hardly the only person deserving of blame for the mortgage debacle. Other subprime lenders such as New Century Financial, Ameriquest and American Home Mortgage either failed or were acquired in fire sales.

Countless Americans tried to get in on the gold rush of soaring home prices by flipping homes. Congress ignored the warning signs and continued to push homeownership. And credit rating companies, eager to maintain the flow of lucrative fees, blessed risky mortgage securities that would later implode.

“Almost all interests were aligned to keep housing moving up,” Stovall said.

Related: Millennials born in 1980s may never recover from Great Recession

The ‘wild west’ of regulation

Regulators failed to aggressively police the mortgage industry, allowing fraud and dangerous loan products to fester for years.

“It was the wild west,” Stovall said.

Worse, Countrywide was allowed to shop around for more lenient regulators who wouldn’t ask as many questions.

In December 2006, Countrywide applied to become a thrift, allowing it to move under the oversight of the Treasury Department’s Office of Thrift Supervision. The OTS, known as the weakest cop on the beat, oversaw three of the most infamous companies of the 2008 crisis: AIG (AIG), Washington Mutual and IndyMac.

“The OTS pandered to the industry” to the point of “near corruption,” said McCoy, the Boston College professor and author, who is also a former mortgage regulator at the Consumer Financial Protection Bureau.

Under the Dodd-Frank law of 2010, Congress abolished the OTS. The legislation created the CFPB, which sniffs out mortgage and other types of abuse.

Since taking office last year, President Trump has signed laws that have chipped away at post-crisis regulations. Trump has also handpicked leaders for regulatory agencies who support rolling back rules. Mick Mulvaney, the acting head of the CFPB, once called the agency a “joke” and pushed to eliminate it.

Although the vast majority of Dodd-Frank remains intact, the deregulatory shift in America has raised concern that the lessons of Countrywide have already been forgotten.

“We need to be very cautious,” Adams said. “It would be a mistake to bring ourselves anywhere close to where we were just prior to the financial crisis.”